Things aren't looking bullish, and they aren't looking bearish either

When markets closed Friday, the Dow was the only major index in the red for the first half of the year, falling about 1%, while the S&P 500 was up over 2% and the tech-heavy Nasdaq gained more than 9%.

But the late-January peak was followed by the Dow logging a 1,000 point daily loss twice in one week as financial markets went from expressing exuberance over lower corporate taxes in the U.S. and a synchronized global economic expansion to near panic.

Thing will either go one way, or another way. (Wikimedia Commons)

The first quarter’s record highs were accompanied by record inflows to global stocks in the first quarter, according to analysts at Jefferies. In the second quarter, however, $14 billion was taken out of global stocks as stock markets in Europe lagged their U.S. counterparts, Chinese stocks entered a bear market, and emerging markets got drilled, losing 10% in the second quarter.

In late February, President Donald Trump announced tariffs on the import of steel and aluminum, the first of what has become a series of tariffs and counter-tariffs announced by the White House and America’s major trading partners.

As the first half of the year drew to a close, this past week saw Trump scold Harley-Davidson (HOG), an American manufacturing icon, for announcing it would make more motorcycles overseas to avoid tariffs for exports to the EU.

And now, we look forward

So as we enter the second half of the year, we know that workers and consumers remain confident in the economic expansion as do economists. Changing trade dynamics, of course, could further complicate the economic outlook.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote this week that economic growth has accelerated this year and things augur well for the second half of the year. Businesses are confident, interest rates are still relatively low, credit is available, and a lack of labor is requiring companies to increase investment and boost productivity.

The labor market is also still demanding more workers than are available, and with productivity likely increasing from more investment, wages appear set to accelerate. The Federal Reserve’s moves for the remainder of this year — an additional interest rate hike in both September and December — are now the base case for markets, but how the central bank responds to rising wages and inflation presents a risk to the economy next year, in Shepherdson’s view.

Also, expect markets to keep an eye firmly trained on the Treasury yield curve, where the difference between short- and long-term Treasury yields is now at a more than 10-year low. Short-term rates exceeding longer-term rates, or an inversion of the yield curve, has tended to precede recessions by about two years.

With the economic backdrop remaining constructive for investors, the stock market setup for investors still remains mixed.

In 2017, markets reacted to a positive boost in business sentiment after Trump’s win, synchronized global economic growth, and the potential for tax cuts. With tax cuts passing, Bespoke Investment Group notes that high tax companies have been huge outperformers this year, a trend unlikely to continue. Not great news for the market going forward.

Tax cuts have been a major catalyst for the market this year after investors doubted that Congress would get anything done last year. (Source: Bespoke Investment Group)

The midterm elections this November also pose a risk to markets, as Democrats taking control of one or both houses of Congress would stymie some parts of Trump’s agenda in the final years of his presidential term. Trade, we’d note, has largely been an area where Trump can act without Congressional support.

And looking at the market’s technical setup, it is kind of a mess right now.

“2017 was characterized by slow and steady gains with rarely any down days, which resulted in one of the most beautiful uptrending chart patterns you’ll ever see,” Bespoke wrote in a note to clients on Friday.

The market’s set up into the second half of this year doesn’t look particularly bullish or bearish, leaving investors caught in the middle. (Source: Bespoke Investment Group)

“If 2017 was beautiful, the market does not want to look at itself in the mirror in 2018,” the firm adds.

“While the uptrending pattern continued in January, since the S&P’s peak on January 26th, we’ve generally seen downward or sideways action. As we end the first half, the S&P is still struggling to find its way. From a purely technical perspective, investors do not have a particularly bullish set-up right now, although it’s not bearish either.”